Kenny v. Pacific Investment Management Company LLC et al

Filing 140

ORDER granting plaintiff's 102 Second Sealed Motion to compel by Judge Ricardo S Martinez.(RS)

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

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Case No. C14-1987-RSM

ROBERT KENNY,

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ORDER GRANTING PLAINTIFF’S
SECOND MOTION TO COMPEL

Plaintiff,

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v.

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PACIFIC INVESTMENT MANAGEMENT
COMPANY LLC, a Delaware limited liability
company; PIMCO INVESTMENTS LLC,

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Defendants.

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I.

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INTRODUCTION

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This matter comes before the Court on Plaintiff Robert Kenny’s Motion to Compel

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PIMCO Trustees to Produce Documents. Dkt. #102 (filed under seal). Mr. Kenny moves the

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Court to compel certain Independent Trustees1 of the PIMCO Total Return Fund (“Fund”) to

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produce documents they have redacted or withheld under the attorney-client privilege. The

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non-party Trustees and Defendants Pacific Investment Management Company LLC and

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PIMCO Investments LLC (collectively, “PIMCO”) each oppose this Motion. Dkts. #113 and

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#120. For the reasons set forth below, the Court GRANTS Plaintiff’s Motion.

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This motion is brought against Trustees George Borst, E. Philip Cannon, Jennifer Dunbar, J. Michael Hagan,
Gary Kennedy, Peter McCarthy, and Ronald Parker. Dkt. #102 at 4 n.1.

ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 1

II.

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BACKGROUND

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A full background of this case is not necessary for the purposes of this Motion. Plaintiff

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Robert Kenny is a shareholder of the PIMCO Total Return Fund (“Fund”), a mutual fund run

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and distributed by Defendants. Dkt. #1 at 4. Mr. Kenny began investing in this fund in 2011.

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Id. at 5. Plaintiff alleges that Defendants have breached their fiduciary duty owed to the

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shareholders of the Total Return Fund pursuant to Section 36(b) of the Investment Company

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Act (“ICA”) by charging the Fund excessive fees in four instances: Investment Advisor Fees,

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Supervisory and Administrative Fees, Distribution Fees, and Servicing Fees. Id. at 18-27.

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Plaintiff alleges that, although the Total Return Fund has grown substantially in size, the fees

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have grown proportionally, “reflecting a failure to pass on economies of scale to the Fund.” Id.

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at 27. Plaintiff alleges that the fees charged to the shareholders of the Total Return Fund are

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excessive when compared to other PIMCO clients, including private individual investors and

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shareholders of two other funds. See id. at 36-42. Plaintiff’s Complaint provides lengthy and

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detailed allegations that the management structure and high compensation of the PIMCO Board

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has led to a lack of independence and conscientiousness and thus this breach of fiduciary duty.
See id. at 50-57.
On November 30, 2015, Plaintiff issued non-party document subpoenas to the
Independent Trustees. See Dkt. #116 at 8. In response, the Independent Trustees redacted and

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withheld over 200 documents on the basis of the attorney client privilege. See Dkts. #101-2

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(“Redaction Log”) and #101-3 (“Privilege Log”).

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withholding for, inter alia, “[c]ommunication relating to confidential legal advice regarding

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preparation for or information received in connection with other board or committee meetings,”

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These logs indicate redactions and

“[c]ommunication relating to confidential legal advice regarding the departure of William H.

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 2

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Gross or Mohamed El-Erian and board governance matters,” “[c]ommunication relating to

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confidential legal advice regarding the consideration, addition, and/or integration of new

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Independent Trustees,” “[c]ommunication relating to confidential legal advice regarding the

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annual review and approval of the Total Return Fund's Investment Advisory Contract,

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Supervision and Administration Agreement, and Distribution and Servicing Plans,” and

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“[c]ommunication relating to confidential legal advice regarding the retirement of Independent

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Trustees.” Id.

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III.

DISCUSSION

A. Legal Standard

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“Parties may obtain discovery regarding any nonprivileged matter that is relevant to

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any party’s claim or defense and proportional to the needs of the case, considering the

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importance of the issues at stake in the action, the amount in controversy, the parties’ relative

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access to relevant information, the parties’ resources, the importance of the discovery in

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resolving the issues, and whether the burden or expense of the proposed discovery outweighs

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its likely benefit.”

Fed. R. Civ. P. 26(b)(1) (effective December 1, 2015).

“Relevant

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information for purposes of discovery is information ‘reasonably calculated to lead to the

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discovery of admissible evidence.’” Surfvivor Media, Inc. v. Survivor Prods., 406 F.3d 625,

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635 (9th Cir. 2005).

“District courts have broad discretion in determining relevancy for

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discovery purposes.” Id. (citing Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir. 2002)). If

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requested discovery is not answered, the requesting party may move for an order compelling

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such discovery. Fed. R. Civ. P. 37(a)(1). The party that resists discovery has the burden to

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show why the discovery request should be denied. Blankenship v. Hearst Corp., 519 F.2d 418,

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429 (9th Cir. 1975).

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 3

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B. The Fiduciary Exception to the Attorney-Client Privilege

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“The attorney-client privilege protects confidential disclosures made by a client to an

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attorney in order to obtain legal advice” as well as “an attorney’s advice in response to such

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disclosures.” United States v. Ruehle, 583 F.3d 600, 607 (9th Cir. 2009). The attorney-client

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privilege “is the oldest of the privileges for confidential communications known to the common

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law.” Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981)

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(citing 8 J. Wigmore, Evidence § 2290 (J. McNaughton rev. 1961)). Its aim is “to encourage

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full and frank communication between attorneys and their clients and thereby promote broader

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public interests in the observance of law and administration of justice.” 449 U.S., at 389.

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However, “the privilege stands in derogation of the public’s ‘right to every man’s evidence’

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and as ‘an obstacle to the investigation of the truth,’ [and] thus… ‘[i]t ought to be strictly

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confined within the narrowest possible limits consistent with the logic of its principle.’”

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Ruehle, 583 F.3d at 607 (citing In re Horowitz, 482 F.2d 72, 81 (2d Cir. 1973) (citations

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omitted)). Though the attorney-client privilege is essential to facilitating open attorney-client

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communications, it is at the same time not absolute.

See Chandola v. Seattle Housing

Authority, No. 13-557 RSM, 2014 WL 4685351, at *2 (W.D. Wash. Sept. 19, 2014).
Plaintiff argues that a “fiduciary exception” to the attorney-client privilege should apply
in this matter. Dkt. #102 at 8 (citing United States v. Jicarilla, 564 U.S. 162, 171-72 (2011);

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United States v. Mett, 178 F.3d 1058, 1062 (9th Cir. 1999)). In Jicarilla, Plaintiff argues, the

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Supreme Court summarizes prior cases holding that the attorney-client privilege cannot be a

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basis for withholding information from the beneficiary of a trust when a trustee seeks or is

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provided legal advice to “guide the administration of the trust.” Id. (citing 564 U.S. at 170). In

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such a scenario, “the attorney-client privilege properly belonged to the beneficiaries rather than

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 4

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the trustees.” Jicarilla, 564 U.S. at 172. Only where the trustee shows that he or she obtained

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legal advice for his or her own personal protection or independent personal purpose will the

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attorney-client privilege survive. Id. This rule ensures that there is a “full disclosure necessary

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in the trustee-beneficiary relationship,” which is “ultimately more important than the protection

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of the trustees’ confidence in the attorney for the trust.” Id. at 172-73 (quotations and citation

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omitted).

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exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from

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asserting the attorney-client privilege against plan beneficiaries on matters of plan

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Meanwhile, Mett holds that “[a]s applied in the ERISA context, the fiduciary

administration,” while also holding that legal advice for pending litigation may not fall under

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the exception. 178 F.3d at 1063. Plaintiff cites Mett for the “two distinct rationales” for the

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fiduciary exception: (1) that there is a duty under the applicable law to “disclose to plan

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beneficiaries all information regarding plan administration;” and (2) the “notion that, as a

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representative for the beneficiaries of the trust which he is administering, the trustee is not the

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real client in the sense that he is personally being served.” Id. at 8 (citing 178 F.3d at 1063).

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Plaintiff argues that the fiduciary exception “had its genesis in English trust law, but has since

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been applied to numerous fiduciary relationships.” Id. at 9 (citing Mett, 178 F.3d at 1063).

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Plaintiff argues that the PIMCO Funds Trust “is a trust” and “is a Massachusetts business

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trust.”

Id.

Plaintiff discusses the fiduciary nature of the independent trustees under

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Massachusetts and federal law. Id. at 9-10. Plaintiff argues that the communications at issue

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were provided to the Independent Trustees in their role as fiduciaries and relate to plan

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administration. Id. at 11-18. Plaintiff argues that “the source of payment of the trustee’s

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counsel is a persuasive factor in the application of the fiduciary exception.” Id. at 12 (citing

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Jicarilla, 564 U.S. at 173). Plaintiff argues that the legal counsel at issue was paid for by the

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 5

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Trust rather than Defendants, citing the Fund’s administration agreement which states that the

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Trust pays the “fees and expenses of legal counsel retained for their [the Trust’s] benefit.” Id.

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(citing Dkt. #103-7 at 8) (filed under seal)).

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In Response, the non-party Independent Trustees argue that “no court in this District,

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this Circuit or elsewhere, has ever recognized a ‘fiduciary exception’ in the context of (a) the

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mutual fund industry, (b) communications between non-party independent trustees and their

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independent counsel, or (c) the hundreds of Section 36(b) lawsuits filed in the 45 year history

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of Section 36(b).” Dkt. #113 at 5 (filed under seal). The Trustees argue that they carefully

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redacted and withheld documents and accurately labeled such redactions and withholdings in

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the privilege log, discussed supra. Id. at 8. The Trustees argue that there is no dispute that the

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communications would normally be attorney-client privileged. Id. at 9. The Trustees contend

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that the fiduciary exception should not be extended by this court to the mutual fund context as

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it is “wholly incompatible with the legal framework governing mutual funds.” Id. The

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Trustees argue that the ICA provides that investment companies must be governed by a board

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of trustees, at least 40% of whom must be independent. Id. at 10 (citing 15 U.S.C. §§80a-2,

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80a-10). The Independent Trustees emphasize the “independent” nature of their role, and the

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importance of freely communicating with independent legal counsel under the protection of the

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attorney-client privilege. Id. at 10-11. The Trustees argue that “the privilege ‘exception’

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Plaintiff would have this Court announce under the pretense of shareholder interest would

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actually destabilize the mutual fund industry to the detriment of all shareholders.” Id. at 12.

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The Trustees distinguish Mett, relied on by Plaintiff, from the facts of this case, arguing that the

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Ninth Circuit recognized in Mett a narrow fiduciary exception “in the ERISA context” where

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“‘an employer acting in the capacity of ERISA fiduciary is disabled from asserting the

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 6

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attorney-client privilege against plan beneficiaries on matters of plan administration,” 178 F.3d

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at 1062-63, but that “[n]othing in that case, or any other, indicates that ERISA trusts,

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administrators, and beneficiaries are sufficiently analogous to mutual fund trusts, trustees, and

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shareholders… Id. at 13 (citing Mett, supra). The Trustees argue that the PIMCO trust as a

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Massachusetts Business Trust is “critically different” from an ERISA trust or common law
trust. Id. at 13-14.

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Defendant PIMCO’s Response “join[s] the Independent Trustees’ opposition and the

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arguments they assert therein…” Dkt. #120 at 5 (filed under seal). PIMCO devotes a great

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deal of ink responding to facts which it admits have “nothing to do with the legal issue
presented by [Plaintiff’s] motion.” Id. at 6.2 PIMCO argues that “[i]f the communications of

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[the] independent trustees with their independent counsel were opened to the public, those

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communications could be chilled…” Id. at 13. PIMCO relies heavily on an out-of-circuit case,

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Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970), for the proposition that

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Plaintiff must show “good cause” for overcoming the attorney-client privilege. See id. at 13-

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14. PIMCO argues that “[b]y challenging the independence and conscientiousness of the

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Fund’s Trustees and asserting that the evidence developed so far suggests serious flaws in the

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Board’s process… Plaintiff has disclaimed a unity of interest with the Trustees…” Id. at 15

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(internal quotations and citations omitted).

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On Reply, Plaintiff argues that Mett does not explicitly limit the fiduciary exception to

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ERISA or common-law trust cases. Dkt. #130 at 4 (filed under seal). Plaintiff argues that the

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Independent Trustees are fiduciaries to the fund shareholders, and that they were not seeking

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personal legal advice or advice in anticipation of this or any other litigation. Id. at 5. Plaintiff

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argues that “the fiduciary exception should apply to litigation under §36(b) of the [ICA]”

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These facts and related arguments are deliberately omitted from discussion.

ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 7

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because such cases are “inherently derivative” and because “the fiduciary duty imposed by §

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36(b) is identical in content to that imposed on dominant or controlling shareholders.” Id. at 6-

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7 (citing Jones v. Harris Assocs. L.P., 130 S.Ct. 1418, 1427 (2010); Fausek v. White, 965 F.2d

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126, 133 (6th Cir. 1992); In re Transocean Tender Offer Sec. Litig., 78 F.R.D. 692, 694-95

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(N.D. Ill. 1978) (emphasis added)). Plaintiff argues that the Ninth Circuit has not adopted a

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requirement that good cause be shown as required under Garner, supra. Id. at 8 (citing the

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Trustees’ briefing, Dkt. #113 at 16 n.12 (“Although the Ninth Circuit has not expressly

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recognized the “good cause” pre-requisite to applying the “fiduciary exception” recognized in

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Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), see Weil v. Inv./Indicators Research &

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Mgmt., 647 F.2d 18 (9th Cir. 1981), Plaintiff does not and cannot demonstrate good cause

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here.”). Plaintiff then proceeds anyway to present “good cause” for the application of the

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exception. Id. at 8-12. Plaintiff suggests the Court should conduct an in camera review “if the

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Court believes Plaintiff has met his burden for applying the exception but wants to ensure that

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the information in each document meets the threshold for production to Plaintiff.” Id. at 11.

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On Surreply, the Independent Trustees ask the Court to strike material in the Reply

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“that raises two new arguments beyond the scope of the Motion,” namely that § 36(b) cases are

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inherently derivative and that “good cause” exists in this case. Dkt. #134.

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The parties do not dispute the relevance of the requested materials. Plaintiff concedes

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that the attorney-client privilege would normally apply to the communications contained in the

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materials. See Dkt. #102 at 11. Thus the only question before the Court is whether to apply the

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fiduciary exception from Jicarilla and Mett to the instant matter. The Court notes Plaintiff’s

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inability to cite any precedent for extending this exception to the context of this case, i.e.

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otherwise privileged attorney communications with the independent trustees of a mutual fund

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 8

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set up as a trust under Massachusetts law. However, the Court also notes that PIMCO and the

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Independent Trustees are unable to cite any case barring the application of the fiduciary

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exception. In considering this issue of first impression, the Court looks to the law cited by

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Plaintiff from Jicarilla and Mett, the ways those fact patterns differ from the instant matter, and

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the rationale for the fiduciary exception.

The Court notes that, despite the Independent

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Trustees’ emphasis on the independence of their role, it is from the Plan Administrator that they

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are independent, not the trust beneficiaries, i.e. shareholders.

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PIMCO’s arguments about the importance of the attorney-client privilege or the applicable

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None of the Trustee’s or

statutory and regulatory structure satisfactorily explain why the independent trustees, acting as

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fiduciaries to the beneficiaries of the trust, should be able to resist disclosure to those
beneficiaries of attorney communications paid for by the trust for the benefit of the trust.

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Considering all of this, the Court finds the instant matter sufficiently analogous to

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situations cited by Jicarilla and Mett where the fiduciary exception has been applied. The

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PIMCO Total Return Fund is indisputably set up as a trust. The Independent Trustees clearly

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owed a fiduciary duty to Plaintiff and other shareholders. The communications at issue include

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legal advice for managing the fund, not personal advice to the Trustees, and the

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communications were not made in anticipation of this or any other litigation.

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The Court finds that the Defendants and the Independent Trustees have failed to meet

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their burden of showing why the discovery request should be denied and will therefore grant

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Plaintiff’s Motion. Because there is little dispute as to the nature of the communications, the

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Court need not conduct an in camera review. Nothing in this Order requires public disclosure

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of the requested materials and there is a stipulated protective order already in place. See Dkt.

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 9

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#55. The Court has not relied on the arguments contained in Plaintiff’s Reply to reach this
conclusion, and thus concludes that the Independent Trustee’s request to strike is moot.

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IV.

CONCLUSION

Having reviewed the relevant briefing, the declarations and exhibits attached thereto,

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and the remainder of the record, the Court hereby finds and ORDERS that Plaintiff Robert

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Kenny’s Motion to Compel (Dkt. #102) is GRANTED. The Court orders the Trustees to

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produce: (a) unredacted versions of the documents listed in Exhibit 1 to the Lin Declaration,

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Dkt. #101-1; and (b) all of the withheld documents listed in the Trustees’ Amended Privilege

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Log, Dkt. #101-3.

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DATED this 21 day of November 2016.

A

RICARDO S. MARTINEZ
CHIEF UNITED STATES DISTRICT JUDGE

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ORDER GRANTING PLAINTIFF’S SECOND MOTION TO COMPEL - 10